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CubeSmart  (NYSE:CUBE)
Q1 2019 Earnings Call
April 26, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the CubeSmart First Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note that this event is being recorded.

At this time, I would like to turn the conference over to Josh Schechter (ph), Director of Financial Analysis. Please go ahead, sir.

Josh Schechter -- Director of Financial Analysis

Thank you, Neeth. Hello, everyone. Good morning from Malvern, Pennsylvania. Welcome to CubeSmart's first quarter 2019 earnings call. Participants on today's call include Chris Marr, President and Chief Executive Officer; and Tim Martin, Chief Financial Officer. Our prepared remarks will be followed by Q&A session.

In addition to our earnings release, which was issued yesterday evening supplemental operating and financial data is available under the Investor Relations section of the Company's website at www.cubesmart.com. The Company's remarks will include certain forward-looking statements regarding earnings and strategy that involve risks, uncertainties and other factors that may cause the actual results to differ materially from those forward-looking statements. The risks and factors that could cause our actual results to differ materially from forward-looking statements are provided in documents the Company furnishes to or files with the Securities and Exchange Commission. Specifically the Form 8-K we filed this morning together with our earnings release filed with the Form 8-K and the Risk Factors section of the Company's Annual Report on Form 10-K.

In addition, the Company's remarks include reference to non-GAAP measures, a reconciliation between GAAP and non-GAAP measures can be found in the first quarter financial supplement posted on the Company's website at www.cubesmart.com.

I will now turn the call over to Chris.

Christopher P. Marr -- President and Chief Executive Officer

Hi, thank you, Josh and good morning. Thanks, everybody for your interest in CubeSmart. In the first quarter, we experienced encouraging consumer demand trends across our portfolio with our same-store revenue and occupancy solidly in line with our expectations entering the year and our joint venture in non-same-store properties modestly outperforming our occupancy and revenue expectations. In our year-end 2018 call, Tim articulated that we were factoring into our 2019 growth expectation, the impact of new supply on approximately 50% of the stores included in our same-store portfolio.

Our updated supply data continues to support our thesis that the rolling three-year impact of supply in our top markets will be greater in 2019 than what we experienced in previous years. In reviewing our significant markets, we do see some signs of life in those markets such as Austin, that saw new supply earliest in this cycle. Based on current data, those markets that saw supply earlier in the cycle also appeared to have the sharpest drop in anticipated 2020 deliveries.

Our New York properties remain consistent performers in the face of new supply. While we do continue to factor in gradually increasing supply impact on our Brooklyn portfolio through 2019. The Bronx similar to my previous commentary regarding markets that experienced new supply early in the cycle experienced solid quarter-over-quarter growth in both occupancy and asking rents. Miami, Denver, Charlotte are markets that are in the midst of dealing with the impact of significant new supply.

While current data suggests a decline in deliveries in 2020, a rolling three-year impact will remain elevated and we would expect those markets to be challenged operationally into next year. Houston in the first quarter had a difficult hurricane comp to 2018, so we do expect the growth rates to improve over the course of the year. However, supply will continue to weigh heavily on operating fundamentals.

As we survey the landscape and speak to our 175 plus and growing 3PM clients as well as our industry contacts, the following themes emerge. Our self-storage customer remains healthy and the overall US consumer continues to benefit from high employment, growing wages, low interest rates and strong financial markets. The more seasoned self-storage developers' use of primary markets is being late cycle and are either scaling back their efforts or shifting to secondary market opportunities. Banks and borrowers are just beginning to experience the impact of lower than expected rental rates in the over-developed markets, adding an additional hurdle to new development projects in those markets.

A fairly universal thesis that 2020 supply in the top MSAs will decline from current levels and markets with strong demographics and low square feet per capita will bounce back more quickly from the impact of supply. And finally the healthy cash flow growth from our business in the face of supply has further validated the enormous importance of brand and a scalable operating platform.

With that I will turn it over to Tim Martin, our Chief Financial Officer.

Timothy M. Martin -- Chief Financial Officer

Thanks, Chris. And thanks to everyone joining us on the call for your continued interest and support. We reported first quarter 2019 results last evening, including a headline result of $0.40 per share of FFO as adjusted, which was at the high end of our provided guidance range and represents 2.6% growth over last year. Overall for the quarter, our results were very much in line with our expectations. Same-store NOI of 2.8% was driven by a 2.6% increase in revenue, and a 2.2% increase in operating expenses. All three metrics, very much in line with our expectations. Occupancy levels were flat year-over-year on both an average an ending basis. Our same-store expense growth was impacted by a 4.2% growth in real estate tax expense and a 3.1% increase in personnel costs offset by flat advertising costs and lower weather-related cost as compared to last year.

During the first quarter, we closed on one wholly owned property acquisition in Annapolis, Maryland for $22 million. We added 46 stores to our third-party management program, bringing our managed store count up to 619 at quarter end. In the first week of April, we opened two stores from our development program, one of the stores in Queens, New York, the other in Bayonne, New Jersey. We also added a new development project to our pipeline in Arlington, Virginia. This store will be adjacent to our existing store in Arlington that we developed back in 2015 and the new development is expected to open in the first quarter of 2021 and is an exciting opportunity for us given Amazon's announcement, a few months back about the location of their new East Coast headquarters location.

On the balance sheet, we were active in the first quarter using our at-the-market equity program raising net proceeds of $24.6 million at an average sales price of $32.20 per share. And as we discussed on the last earnings call in January, we completed the offering of $350 million of 10-year senior unsecured notes with a coupon of 4.375%. We used the proceeds from the bond deal to repay a $200 million term loan that was set to expire in 2019 and the balance to reduce borrowings under our revolver. We have very manageable debt maturities over the next three years. We've reduced our floating rate debt exposure to just 11% and we've elongated our average years to maturity to 5.8 years.

Our landscape for 2019 hasn't changed much since we provided our initial guidance two months ago. Our first quarter results in April performance give us additional comfort and confidence in the guidance ranges that we have provided. We did modestly increase our annual FFO per share as adjusted guidance by bringing up to bottom end by a $0.01. Overall, first quarter for us was right in line with what we expected. Pressure from a rate perspective in markets that are experiencing heightened levels of new supply, not new news and not a surprise.

We're using slightly more discounts this year over last year, not a surprise. We're seeing demand sufficient to keep our occupancies flat year-over-year, again, very much what we expected. So overall, no new news from an operating fundamental perspective, which is good news to us, gives us increased confidence in meeting the expectations that we laid out for the year as we head into our busy summer rental season.

So thanks again for joining us on the call this morning. At this point, Denise, let's open up the call for some questions.

Questions and Answers:

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) And your first question this morning will come from Shirley Wu (ph) of Bank of America Merrill Lynch. Please go ahead.

Shirley Wu -- Bank of America Merrill Lynch -- Analyst

Good morning, guys. Thanks for taking the question. So the first question is on guidance. So given you've maintained core and revenue at 2%, expenses at 3.5%, what's the cadence of same-store revenue expense growth for the remainder of this year?

Timothy M. Martin -- Chief Financial Officer

I'm sorry, same-store expense growth is that -- was that your question?

Shirley Wu -- Bank of America Merrill Lynch -- Analyst

So, given you have maintained revenue and expense growth. So, the revenue growth being 2.6% compared to your guidance of 2% and expense growth coming in at 2.2% versus your guidance at 3.5%. How do you expect the rest of this year to play out?

Timothy M. Martin -- Chief Financial Officer

Yeah. Got you. So on the revenue side, it's a range, I mean your focus on the midpoint at 2%, a range of 1.5% to 2.5%, our first quarter at 2.6% is just above the high end of that range. We do expect deceleration to continue, it's not always as smooth as everyone would like it to be, but we do expect a gradual deceleration as we continue into 2019 on the expense front. There are a lot of line items and expenses that are relatively easy for us to predict on an annual basis, sometimes the timing is a little bit more challenging in particular, in areas like repair and maintenance expense, sometimes seasonal expenses we had. Some good news in the first quarter based on some weather related comps, not good news necessarily versus our expectations, but good news on a year-over-year basis.

Marketing expense, can be a little bit lumpy. So, from an expense standpoint, despite the fact that our first quarter is it looks attractive relative to our range. We remain very comfortable with the range that we provided for the entire year.

Shirley Wu -- Bank of America Merrill Lynch -- Analyst

That's fair, then, could you speak a little to what drove the FFO bump on the lower end side?

Timothy M. Martin -- Chief Financial Officer

Really just coming in at the high end of our first quarter number.

Shirley Wu -- Bank of America Merrill Lynch -- Analyst

Okay. So, one last question, could you speak to your net effective rate trends in 1Q, and maybe even into April so far?

Timothy M. Martin -- Chief Financial Officer

Sure, so the different components, of course, from an asking rate perspective, we've seen, asking rates down in the 1% to 2% range. We've seen, we've seen discounts, as I mentioned in my prepared remarks, discounts have increased a bit year-over-year. We've been talking for several quarters, not several years that levels of discounts as a percentage of revenues were at historical lows and there was really nowhere to go, but up and were in that period of time where they're going up slightly. So, discounts as a percentage of revenues were 4.1% or 4.2% for the quarter, which is up about 30 basis points over last year. So those are -- those are some of the components, some of the drivers.

Shirley Wu -- Bank of America Merrill Lynch -- Analyst

Have you seen that change in April?

Timothy M. Martin -- Chief Financial Officer

No very consistent -- April performance has been very consistent from all of those metrics to what we saw in the first quarter.

Shirley Wu -- Bank of America Merrill Lynch -- Analyst

Got it. Thanks for the color.

Timothy M. Martin -- Chief Financial Officer

Thanks.

Operator

The next question will be from Jeremy Metz of BMO Capital Markets. Please go ahead.

Jeremy Metz -- BMO Capital Markets -- Analyst

Hey, guys. Good morning. Good morning. Tim, in your remarks you mentioned no new news on the operating front. Chris, you started by mentioning revenue and occupancy being right in line with expectations. But you also started a call saying you're seeing encouraging signs in the demand front, so, can you maybe just expand on that a little bit and help tie those together, because, on one hand, it sounds like everything was sort of in line. But it also sounds like you're feeling better today looking out from here.

Timothy M. Martin -- Chief Financial Officer

Yeah, I think the point of connection there. Jeremy, thanks for the question, is just looking at the two groups of assets. So, when we look at the entire portfolio, our non-same-store, our joint venture and then even if you include the 600 plus third party storage that we manage. We're seeing very good demand in the overall sub marketplace, now how that demand flows into the same stores relative to the newly opened stores. I think is what has caused the same-store metrics to be very consistent with what we had expected, which is encouraging.

And then we're seeing the physical occupancies on the newly opened stores continue to lease up at a nice pace.

So, overall demand in these markets and submarkets remains quite healthy and more than adequate we think especially, in the battery demographic markets to fill up the new supply in a way that is I think comforting to the overall self-storage environment in those markets.

Jeremy Metz -- BMO Capital Markets -- Analyst

And just sort of sticking with what you're seeing. I know you and your peers operate differently in terms of revenue strategies. But you also canvass the market here. So as you look into some of your bigger metros where you compete with some of the bigger public or even private owners, are you seeing any behavioral changes in the market in terms of how aggressive or not folks are being, and rents are discounting and whatnot?

Christopher P. Marr -- President and Chief Executive Officer

No, I would say that -- that on stores that opened new store openings, nothing new. You still have folks, if you try to book in the two strategies, there is -- there is, I am a holder of this asset for an infinite amount of time and therefore, I want to lease it up in the way that will maximize my revenue and my return over that very long-term hold expectation. Therefore, it's a more methodical lease-up at higher net effective rents. You have those folks who may have a much shorter time frame in terms of their expectation, and therefore you see them focusing more on how rapidly can I gain physical occupancy at the cost of the current effective rent that I'm getting. That's not new, that's been like that for a long time and it continues to be like that. Nobody is moving, beyond those two bookends, we're not seeing anything -- we're seeing anything odd.

Jeremy Metz -- BMO Capital Markets -- Analyst

I appreciate that color. And then just a last one from me, also something you mentioned in your remarks about banks and borrowers feeling the impacts of lower revenue expectations in rents. As this is playing out, are you looking at or seeing any broken development deals or non-stabilized deals or the developer owner and just isn't hitting expectation, and therefore they're looking to get out and is this an opportunity set that's increased at all?

Christopher P. Marr -- President and Chief Executive Officer

I think it will be an opportunity, how robust will remain to be seen. This is an incredibly resilient property type. So, my 25 years you rarely see an outright burst, it's just disappointment as I've said. And I think we're early in that, in year one of the new projects, the lease up, often times the expectation was for heavy discounting or lower rents in exchange for some physical occupancy in the pro forma.

So, in year one, you can often, somewhat disguise the fact that your rental rates may be lower than you would have expected. It's not really until you get into year two, when you would have pro forma at some form of growth in the effective rents, and all the sudden you're not seeing that. And so the NOIs start to become a little more pressured. So I still think we're early in that this would be the, 2019 after we get through this rental season, it will be the deals that opened in 2017 that will be starting to feel the impact and to some degree I guess those that opened in late '16.

So early, but I do think it's going to present an opportunity, historically how robust that is, I think we're going to have to see other macro events, such as pressure on the banks or a rising rate environment. Something else that will add fuel to that.

Jeremy Metz -- BMO Capital Markets -- Analyst

Thanks for the time.

Operator

The next question will be from Todd Thomas of KeyBanc Capital Markets. Please go ahead.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Hi, thanks. Good morning. First, Tim, a quick follow-up or clarification I guess to your response to Shirley's question on asking rates, are asking rates down 1% to 2%? Is in the negative 1% to 2% or are they still positive, but down to 1% to 2%?

Timothy M. Martin -- Chief Financial Officer

I am sorry. I wasn't very clear, I guess, they are negative 1% to 2% across the portfolio. And of course that's a tale of -- there are markets that are positive to very positive and there are markets that are challenged, but when you add it all together across the portfolio, asking rates are down, between 1% and 2%.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Okay. And then, can you just talk a little bit more about the net rents there? The realized rents per occupied square foot. So revenue growth was entirely rate driven in the quarter, there was no change in occupancy and maybe you can just talk about that metric and the mix between existing customer rent increases, and everything else and sort of help us understand how that might trend from here?

Timothy M. Martin -- Chief Financial Officer

Yeah. So it's -- again it's going to be a blend of all of the ingredients that you are aware of, we don't dig into that number to try to parse out the amount of the growth that is represented by rate increases to existing customers. That of course is a portion of it. A portion of it is -- is the asking rate your portion of it, discounts, a portion of its longer length of stay. So, those are all the ingredients, and we're not going to -- we're not going to get in trying to parse out how much was attributable by each one of those.

Christopher P. Marr -- President and Chief Executive Officer

I think macro, though, Todd. If you think about trends, length of stay does continue to elongate very modestly, but it does continue to elongate, part of that is going to be maturation of the portfolio, part of that is going to be, we're finding the Urban customer just tends to stay longer. I think you combine that then, which is giving us an opportunity to pass along increases to a few more folks to the extent that length of stay as elongating and then you look at the magnitude of those rental rate increases hasn't meaningfully changed, but it hasn't gone down.

So I think that's a driver, and then, as Tim said, I think you take that combined with just the churn at an individual property and the sizes that folks are renting and all of that sort of mushes together to get to the rental rate growth you're saying.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Okay. And just lastly the in-place rents that you -- that we see here in the supplement, so they were up 3%, that's gross rents, net rents were up about 2.6%. So you talked about that sort of 30 basis point to 40 basis point headwind from discounting. Is that a good run rate to assume for the balance of the year or do year-over-year comps or operating conditions change that at all throughout the year in your view?

Christopher P. Marr -- President and Chief Executive Officer

Yeah. It's a difficult one to again to try to predict the individual components. I think, we are being more promotional now given some of the headwinds that we've discussed. I would think the best guess as you sit here today, is that as if that was the trend in the first quarter, that's probably the most likely trend to continue into at least into the second quarter, but the systems are going to generate, pricing recommendations on both on asking rate, discounting and promotional basis based on what is going to maximize revenues. That said, I think the most likely thing is -- for there still to be a bit of pressure on a year-over-year basis from a discounter promotions perspective.

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Okay. Thank you.

Operator

And the next question will be from Ki Bin Kim of SunTrust. Please go ahead.

Ki Bin Kim -- SunTrust -- Analyst

Thanks. Can you talk a little bit more about the rent trends that we are seeing in New York City. I think in the opening remarks, you said it was improving to positive territory.

Christopher P. Marr -- President and Chief Executive Officer

Yeah. Hey, Ki Bin, it's Chris. Thanks for the question. Yeah. New York City pretty encouraging Q1 when we show in the supplement, the metrics for the MSA and I think we had maybe modest 20 basis point decline in same-store revenue sequentially there from Q4 to Q1. We actually saw a little bit of acceleration in those metrics in New York City, which was encouraging, good piece of that coming from the Bronx where, again, we've seen good growth in physical occupancies up pretty, pretty nicely there actually. And seeing some growth in the asking rents there as well.

Brooklyn, the occupancies have hung in there really nicely in spite of the fact that we're seeing a pretty consistent delivery of new supply there. Little bit of pressure on rental rates, but not as much as we would have expected in our -- on sort of framing out our thoughts on 2019. Queens also remain solid in the face of a little bit of supply, both occupancy and rental rate and then the one store we have in Staten Island has been a gem and continues to be some so. The new stores and our market are ramping up nicely, consistent with my prior comments from a physical occupancy perspective, albeit at rental rates that are absolutely lower than what we would have expected when we went into the pro forma as many years ago, but we remain encouraged again by the level of demand that we're seeing in the market.

All that being said, our expectations and perhaps we're always cautious especially at this time of the year -- that supply in Brooklyn will begin to have an impact on it. I think our team there, the quality of the stores, the location of the stores has done a great job in mitigating that. I think the power -- the brand in that market has done a great job of mitigating that. We remain cautiously optimistic on how this will play out throughout the year. Right now, we would expect to see some level of deceleration in those metrics in Brooklyn, Queens over the course of the rest of '19.

Ki Bin Kim -- SunTrust -- Analyst

But if you look at that all those markets in totality, what does any sense of like magnitude in terms of the improvement. you're talking about? So are those like rates up a couple of percent or?

Christopher P. Marr -- President and Chief Executive Officer

Yeah, if you look at those markets in totality asking rents are up between 1% and 2% positive, occupancies almost 260 basis points higher than they were at this time last year.

Ki Bin Kim -- SunTrust -- Analyst

Okay. And any sense on how much your own new developments in those markets are actually impacting your metrics. So based on kind of get a sense of when your own properties lease up, how much less cannibalization is there that might benefit your internal New York City portfolio?

Christopher P. Marr -- President and Chief Executive Officer

Yeah. At the time I had given I think 90% of our stable stores in the outer boroughs are experiencing some form of competition and of that 90%, I would say, I don't know 70%, 80% of those, it's a CubeSmart that is in the mix for whether owned or managed, that is that competition. So, yes, a 100% once the lease up store is in the outer boroughs that are branded CubeSmart start to get close to stabilized physical occupancies, our expectation is that we will then begin to see fairly good rental rate growth and again this has been our experience at some locations in the Bronx already and I think it will be in that positive, I also think we are -- we are certainly closer to the end and the beginning on the deliveries of new supply in the outer boroughs as we sit here today.

Ki Bin Kim -- SunTrust -- Analyst

Okay. That's pretty encouraging. Just last question, what are you guys spending on CapEx per square foot on kind of annualized basis?

Christopher P. Marr -- President and Chief Executive Officer

I'm sorry, I just want to make sure I didn't miss, we typically budget in the high $0.30 per square foot, so somewhere between $0.35 and $0.40 per square foot is typical and that hasn't really changed much over the past I would say, 4 years, 5 years.

Ki Bin Kim -- SunTrust -- Analyst

Okay, thank you.

Christopher P. Marr -- President and Chief Executive Officer

Sure.

Operator

The next question will be from Smedes Rose of Citi. Please go ahead.

Smedes Rose -- Citi -- Analyst

Hi, thank you. I just also wanted to ask you on the New York results in the quarter, it looks like expenses were down a little bit and I was just wondering is that maybe tax related or is there -- was there something else that was driving that?

Christopher P. Marr -- President and Chief Executive Officer

Yeah, Steve, it's mostly weather. So I think we just had a little bit lower on the utility side. And then a little bit lower on these other weather-related expenses, quarter-over-quarter.

Smedes Rose -- Citi -- Analyst

Okay. And then the other thing I just I wanted to ask you -- you mentioned that banks and developers will probably start to see somewhat disciplined results, is it your sense that financing for storage has kind of gone back to where it was in the prior peak in the sense of very high loan to construction non-recourse minimal equity investment. Are we kind of back at those levels now. So that's what would need to sort of change on the margin.

Christopher P. Marr -- President and Chief Executive Officer

Yeah, thanks, Smedes, great question. On anything speculative, absolutely not, you continue to see low advance rates recourse I would call it a healthy sort of traditionally normal lending on anything speculative on stable cash flow. There's been a couple of CMBS deals that have been done with private storage operators, you're seeing maybe a more aggressive sort of lending environment given I think the comfort level that the banks have gotten over the years on the resiliency of the product, the strength of the cash flows and frankly how we've all performed through this supply cycle, I think has given them a little more comfort on that side. Again nothing agreed, just -- but I think it's a little more there's is a little more leeway on the stable side.

Smedes Rose -- Citi -- Analyst

Okay. And then just finally, can you just talk about what -- where is the difference between asking rates and in-price rate across the portfolio?

Christopher P. Marr -- President and Chief Executive Officer

Sure happy to Smedes. So when you think about that roll down or whatever terminology of folks like to think about, again it's very seasonal in the fourth quarter, in the first quarter that gap is that it's widest given the fact that combine a couple of things. Our median length of stay remains about 6.5 months. So the majority of folks that would be moving out in the first quarter would have rented during the peak leasing season back last summer. So they would have moved in at the seasonally highest point from a rate perspective and are moving out at the seasonally low, because it -- rates to swing on a seasonal basis.

And so what's typical for the first quarter, is that gap between in-place and ask is in that 10% to 15% range and that's consistent to where we were, this year as compared to last year, we were a little bit wider this year than last year, which is largely attributable on very much aligned with the fact that our street rates are down, 1% to 2% versus where they were last year. So, 10% to 15%-ish below.

Smedes Rose -- Citi -- Analyst

Okay. And then I guess I should compress, as you get into kind of seasonally stronger periods or --

Christopher P. Marr -- President and Chief Executive Officer

Yeah. It does -- it gets back to it gets back to approximating even, when you get to the peak of the leasing season. And then it cycles back down into 10% to 15% range in the off-peak period. It can be 11% one year, 13% another year, but it's -- but it trends of the same way each and every year based on the time of the year from a seasonal perspective, no doubt.

Smedes Rose -- Citi -- Analyst

Okay. All right. Thank you.

Christopher P. Marr -- President and Chief Executive Officer

Thanks.

Operator

The next question will be from Eric Frankel of Green Street Advisors. Please go ahead.

Ryan Lumb -- Green Street Advisors -- Analyst

Thanks. This is Ryan Lumb. I think your occupancy as measured by your 18 same-store pool has been down, I think four consecutive quarters just slightly. Just wondering if that sort of an intentional strategy in balancing price versus occupancy or if it's just a result of a more competitive environment, more challenging to get tenants in the door.

Christopher P. Marr -- President and Chief Executive Officer

Yeah. We don't manage to that physically, physical occupancy number. I think that delta has been at 20 basis points, 30 basis points. So nothing significant. As we sit here today, physical occupancy is 5 basis points, 10 basis points better than it was. Last year and has continued to sort of trend that way through April. So, it moves in a tight band, but again, we're managing, hate to keep repeating the same thing, but we are managing to a maximization of revenue and we will pull all the levers and push all the buttons as we see that.

Ryan Lumb -- Green Street Advisors -- Analyst

Understand. And then I guess maybe back to Ki Bin's question on New York. I think maybe just another question, can you help us reconcile? So it seems like your same-store pool in New York is doing pretty well or at least. You know it's pretty stable in that 3% range, but the lease up of your New York store seems to be I think a little bit behind, what you know an average lease might be expected or do you disagree that the lease-up of New York is right on pace, how do you reconcile those two?

Christopher P. Marr -- President and Chief Executive Officer

Yeah. So I would disagree. I would say, from a physical occupancy perspective, the lease up in New York is equal to or better in some cases, than we would have underwritten. Some of those stores are quite large, in terms of the amount of square feet that we are, that we are leasing. So pleased with the physical occupancy base again on the rental rate side. Absolutely rental rates are lower than we would have expected when we first thought about the individual deals.

Ryan Lumb -- Green Street Advisors -- Analyst

That's helpful color. Thanks.

Operator

(Operator Instructions) Your next question will be from Todd Stender of Wells Fargo. Please go ahead.

Todd Stender -- Wells Fargo -- Analyst

Thanks. And just to go back to that last question, I think it has to do with the size of the properties. When you look at the Queens and Bayonne properties, that are just delivered, can you speak to their sizes? And then, but your original yield expectations that you had for those two, maybe what they are now if they've changed and if any of the inputs changed?

Christopher P. Marr -- President and Chief Executive Officer

Yes, so on the Queens and Bayonne again relative to stable assets in those markets. Our expectation is about $175,000 to $200,000 over stabilized cap rate in those markets in terms of our expected yield at first level of stabilization. In terms of the size of those two assets, you know, they're both -- they're not the 200,000 square footers, I don't have it at my fingertips. So I think both of them are in the more traditional kind of 80,000 square feet, rentable sort of range? And they've each been opened -- they've each been opened for about 20 days, so far so good.

Todd Stender -- Wells Fargo -- Analyst

Yes. Thanks. But that spread over that market cap rate is essentially that remains under -- unchanged, it's just that maybe the benchmark cap rate moves around?

Christopher P. Marr -- President and Chief Executive Officer

Yeah, it's gotten little tire, I mean I think we would have gone into deals in similar markets two or three years ago expecting more $200,000 to $250,000, and now it's more like $175,000 to $200,000.

Todd Stender -- Wells Fargo -- Analyst

Okay, and then where we are in the cycle? And, how about the Arlington project that's your, I guess most prolong project? What kind of yield and growth and maybe lease-up period expectations are underwritten on that?

Christopher P. Marr -- President and Chief Executive Officer

Yeah. Again, I think on that one, relative to the market about the same. Again in that sort of $175,000 to $200,000 over a stabilized cap rate, that project is going to be an adjacent building to our existing Shirlington, which opened a few years back. So, we're going to put, we're going to have, I think close to 200,000 rentable square feet in that area when both stores, when the new store opens adjacent to the other. So it's going to be a lot of square footage in that market. And so, I think our lease up expectation on that new building is probably closer to four years than three.

Todd Stender -- Wells Fargo -- Analyst

Okay, got it. Thank you.

Christopher P. Marr -- President and Chief Executive Officer

Thanks, Todd.

Operator

And ladies and gentlemen, that will conclude our question-and-answer session. I would like to hand the conference back over to Christopher Marr for his closing remarks.

Christopher P. Marr -- President and Chief Executive Officer

Thank you. Thanks, everybody for your interest. As a bit of a follow-up, we have done 62 rentals at the Bayonne store in the last couple of days and it's currently 5% occupied. So off to a great start there, in North Jersey. So thank you all for listening and your -- focused on our Company, and we look forward to speaking to you again when we report second quarter results. Have a great weekend.

Operator

Thank you, sir. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. You may now disconnect your lines. And once again. The conference has concluded. You may disconnect your lines.

Duration: 38 minutes

Call participants:

Josh Schechter -- Director of Financial Analysis

Christopher P. Marr -- President and Chief Executive Officer

Timothy M. Martin -- Chief Financial Officer

Shirley Wu -- Bank of America Merrill Lynch -- Analyst

Jeremy Metz -- BMO Capital Markets -- Analyst

Todd Thomas -- KeyBanc Capital Markets -- Analyst

Ki Bin Kim -- SunTrust -- Analyst

Smedes Rose -- Citi -- Analyst

Ryan Lumb -- Green Street Advisors -- Analyst

Todd Stender -- Wells Fargo -- Analyst

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